Not All Emergency Funds Are Equal

At the end of 2019, no one predicted that the unemployment rate would hit its highest level since the Great Depression, average wages would decline but household incomes would increase, thanks to government stimulus checks.  Had the U.S. government not provided stimulus checks, many more Americans would have struggled financially.

Financial advisors typically recommend having at least 3–6 months of non-discretionary living expenses (i.e., housing, taxes, debt service, groceries referred to as needs). This recommendation helps people handle short-term problems like being out of work for a month or two allowing them to pay their bills and not take on debt. Unfortunately, not everyone had an emergency fund for unexpected expenses, and individuals, depending on their income were impacted very differently.

Looking at the above chart we see that people have been put into one of six buckets based on their income. Those with the highest income (the 90–100 group) showed the most resilience and on average have about 10.7 months’ worth of expenses saved up. That suggests the average person in this group would have been fine and could have lived off savings since the pandemic began. Looking at the other two highest groups (60-79.9 & 80-89.9) have at least the minimum savings typically recommended by financial advisors of three to six months. However, the lower-wage earners are not so lucky and have anywhere from two weeks (less than 20) to 1.6 months in savings (40-59.9).

Due to the economic impact of the pandemic, many individuals hit the hardest were in the lower half of the income earners. This is unfortunate since they have the smallest emergency funds and have been forced to make tough financial decisions like taking on debt or making withdrawals from retirement accounts.

The pandemic has impacted individuals very differently and we are learning about the financial devastation of handling a long-term problem. The stark reminder though is the importance to build and maintain an emergency fund to help when things happen beyond our control. This of course assumes your financial situation allows you to. If you or anyone you know is working to build or rebuild their emergency fund, we are happy to talk and provide some free resources.

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